Renegotiating NAFTA Amidst Rapidly Evolving Leadership, and the Obstacles of the USMCA
Team Lead: Samantha Jennings
Primary Contributor: Lyndsay-Marie Talon
Introduction
The historical relations between Canada, and Mexico have unsurprisingly influenced the renegotiation of NAFTA. It is important, in analyzing the role of politics in the trade agreement, to recognize the motivation and reasoning for re-evaluating NAFTA, and creating its successor, the US-Mexico-Canada agreement (USMCA). Many credit these semi-hostile renegotiations to an executive order in 2017 by American President Donald Trump. Early in 2018, Trump proposed steep duties on steel and aluminum, at 25% and 10% respectively, and stated that “trade wars are good, and easy to win”.[i] Following a tentative agreement, a final obstacle remains in seeking ratification from all three countries legislatures.
The Political Landscape
Following the recent U.S. midterm elections, a newfound Democratic House majority could impede USMCA ratification, which is vital step to preventing further renegotiations and changes to the agreement. However, should the treaty fail to gain approval as it stands, this may encourage President Trump to remain in trilateral talks with Mexico and Canada, despite repeated threats to pull out of the agreement entirely. The political arena has also changed in Mexico. Andrés Manuel López Obrador (AMLO) was elected as Mexico’s next president in the July 2018 election[ii]. Described as a leftist, anti-establishment figure, Mexico’s president-elect took part in movements opposing economic liberalism in the 1980’s. Consequently, some fear mass institutional reforms, limits on free trade or a shift to a regime akin to Venezuela, and the deterioration of already tense relationship with the U.S.[iii] Despite previous tensions between the countries, recent interactions between AMLO and Trump have shown a level of respect.[iv] This relationship will have the potential to stabilize, or condemn the USMCA, which was largely negotiated by the previous Mexican administration which will be out of power as of December 1st 2018.
Beyond elected officials, a recent survey by the Angus Reid Institute found that less than a third of Canadians were satisfied with the new agreement, and 45% identified themselves as “disappointed”, showing resistance on yet another front.[v] Similarly, the tariffs placed upon the Canadian steel and auto industries, which will remain in the new agreement, have created dissatisfaction within the industry.[vi] This sentiment is echoed by the Canadian Dairy industry, which was forced to make greater concessions than expected and subsequently intend to lobby the government to account for those issues both internally and through the ratification process. In opposition to public outcry, the Canadian government holds that the deal is a victory and that it will promote economic stability.[vii]
In addition to USMCA negotiations, the U.S. recently challenged 5 World Trade Organization (WTO) members: China, the EU, Mexico, Canada, and Turkey in separate disputes defending American steel duties, while condemning the allegedly retaliatory tariffs perceived to “punish American workers, farmers and companies.”[viii] The inclusion of the WTO brings the talks even further into the international spotlight, as these tariffs are not singular to North America, despite their use as a bargaining chip in NAFTA renegotiations. This has the potential to be both beneficial and detrimental to the affected North American industries. The WTO and NAFTA promote additional avenues of leverage for the affected industries to lobby duty and tax regulations. On the other hand, existing tension indicates the potential for further conflict, which may prevent the newest agreement from ever achieving ratification.
Mitigation Strategies
Given the unpredictable nature of leadership choices, North American industries should consider comprehensive what-if models.[ix] These models can assist in assessing what power mechanisms, such as duties and tariffs may be put into place by each state. For the steel and auto industry, these additional costs will have long term implications, as the elimination of tariffs through NAFTA has been instrumental to the growth of the auto industry in the U.S., Canada and Mexico.[x] In a constantly changing political landscape, steel and auto companies may need to anticipate potential retaliations, beyond what the normalized precedent may suggest, and without considering the reasoning.
Amongst leadership changes, politics of division and strong “personalities” in power, investors will need to continue to mitigate risks by exerting pressure during negotiations and in the final ratification process of the USMCA and beyond. Already, Canada intends to ensure steel and auto producers are “protected from potential diversion of steel and aluminum from other countries”.[xi] These compromises may be the best avenue to stabilize trade in the steel and auto industry, as governments are generally pleased by the completion of an agreement, without having to revert to bilateral agreements.
The future reduction and elimination of many of the duties and tariffs implemented during negotiations are unclear, leaving a tense atmosphere as the agreement awaits ratification from all three legislatures. For those industries negatively impacted, now is the time to begin risk mitigation, both through projections of potential outcomes and through lobbying and drawing attention to these concerns. Political personalities will also continue to play a key role in volatile political landscapes as executive decisions remain difficult to predict and the USMCA’s future remains unclear.
[i] Kevin Liffey, "Trump Tweets: 'Trade Wars Are Good, and Easy to Win'," Reuters, last modified March 2, 2018, https://www.reuters.com/article/us-usa-trade-trump/trump-tweets-trade-wars-are-good-and-easy-to-win-idUSKCN1GE1E9.
[ii] Lisdey Espinoza Pedraza, "Opinion: Can the 2018 Elections Truly Reshape Mexico?," Global Risk Insights, last modified August 8, 2018, https://globalriskinsights.com/2018/07/can-2018-elections-truly-reshape-mexico/.
[iii] Tyler Mattiace, "Mexico's New President and the Risks to Democratic Institutions," Global Risk Insights, last modified July 3, 2018, https://globalriskinsights.com/2018/07/andres-manuel-lopez-obrador-president-mexico-risks/.
[iv] Dave Graham, "Mexican Leader to Invite Trump to Inauguration, Signals Shift On Venezuela," Reuters, last modified July 5, 2018, https://www.reuters.com/article/us-mexico-politics/mexican-leader-to-invite-trump-to-inauguration-signals-shift-on-venezuela-idUSKBN1JV2TO.
[v] Tom Blackwell, "Barely a Third of Canadians Happy with New North American Trade Deal, Poll Suggests," Financial Post, last modified October 23, 2018, https://business.financialpost.com/news/barely-a-third-of-canadians-happy-with-new-north-american-trade-deal-poll-suggests.
[vi] "Canada’s Finance Minister Touts USMCA but Says Dairy, Steel Sectors Need Help," Financial Post, last modified October 2, 2018, https://business.financialpost.com/pmn/business-pmn/canadas-finance-minister-touts-usmca-but-says-dairy-steel-sectors-need-help.
[vii] "Canada’s Finance Minister Touts USMCA but Says Dairy, Steel Sectors Need Help," Financial Post, last modified October 2, 2018, https://business.financialpost.com/pmn/business-pmn/canadas-finance-minister-touts-usmca-but-says-dairy-steel-sectors-need-help.
[viii] "United States Challenges Five WTO Members Imposing Illegal Tariffs Against U.S. Products," United States Trade Representative, last modified July 2018, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/july/united-states-challenges-five-wto.
[ix]Patrick Burnson, "Supply Chain Managers Reliant on Steel and Aluminum Should Act Now to Mitigate Risk," Supply Chain Management Review, last modified July 30, 2018, http://www.scmr.com/article/supply_chain_managers_reliant_on_steel_and_aluminum_should_act_now_to_mitig.
[x] Patrick Burnson, "BDO Shares NAFTA Risk Mitigation Strategies As Rules May Change," Supply Chain Management Review, last modified August 23, 2017, http://www.scmr.com/article/bdo_shares_nafta_risk_mitigation_strategies_as_rules_may_change.
[xi] "Canada’s Finance Minister Touts USMCA”, Financial Post.
